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Fines Alone Don’t Deter Google

EU officials, who believe normally-big-fines by themselves will be enough to deter Google’s illegal antitrust and privacy abuses, are making a profound miscalculation about what actually motivates and deters Google.

Google’s leadership is not motivated primarily by money, but overwhelmingly by the power and influence of “changing the world” by scaling most every facet of data, computing, and connectivity, first and fastest.

Google’s leadership understands the Internet marketplace is really a simple first-mover race to scale -- and that any fines along the way, without serious limits on Google’s power, are insignificant nuisances.

Google is unlike any other company EU law enforcement has confronted.

Repeatedly, Google has proven its unique serial defiance of antitrust, property, and privacy laws for over fifteen years (See here, here, here, here & here.). Google has accumulated unprecedented information and market power. Google has a uniquely huge appetite for, and tolerance of, most all forms of extreme risk, given it is a public company. And most importantly, Google has unique mastery of speed, scale and network effects on the Internet.

Let’s explore why even potential record EU fines are largely insignificant to Google.

First, Google has already assessed the risk of large fines and isn’t deterred.

Just last week Google Senior Vice President of Global Marketing, Lorraine Twohill summarily dismissed the relevance of EU law enforcement: "Tech moves so fast and Brussels is not even in our top five issues. We have much bigger problems to deal with."

This reflects Google CEO, Larry Page’s views: “show me a company that failed because of litigation. I just don’t see it. Companies fail because they do the wrong things or they aren’t ambitious, not because of litigation or competition.”

Second, Google’s unprecedented ambitions to “change the world” in Google’s image, dwarf fines or law enforcement problems along the way.

Listen closely to the sheer magnitude of Google’s ambitions and how, as first of first movers, they already have largely achieved most of their exceptional ambitions.

“Google’s mission is to organize the world’s information and make it universally accessible and useful…” Google. “Google’s “goal is to change the world, and monetization is a technique to do that;” Google Chairman Eric Schmidt Wired 12-08. “Ultimately our goal at Google is to have the strongest advertising network and all the world’s information;” Google Chairman Eric Schmidt ZDNet 8-06. "Our model is just better… Based on that, we should have 100% share;” Google Chairman Eric Schmidt 12-09. “Our goal with Android is to reach everyone;”Google Chairman Eric Schmidt ATD 4-13. “Our goal is to put computing everywhere.” Google SVP Sundar Pichai Quartz 7-13. “Our goal is to put together a sort of digital mirror of the world;” Google Maps Exec Dan Sieberg Telegraph 9-13. “Anything that you see in the real world needs to be in our database;” Google Map’s Evgeny Morozov Slate 5-13. “Our map… is the world’s map;” Google Earth’s Rebecca Moore SEL 6-12. “There is a real desire for YouTube to be a global classroom and a global town square, not just a global living room;” Google Exec Hunter Walk, per Bloomberg 10-12.

Unlike other public companies, Google is very rare in being able to largely ignore public investors concerns about fines of other big expenditures. To its credit, Google was, and continues to be, very upfront with their public investors that they will manage for the long term, not quarterly profits, and that they will take big, audacious, and expensive bets on the future.

Google’s leadership has ensured that it can continue to operate Google that way for the foreseeable future because they changed the stock structure to concentrate a voting majority of Google’s public shares in the hands of Google’s most senior leadership.

Simply, Google’s leadership will run the company the way they see fit, and they have the ownership control and financial wherewithal to do it.

Doug Edwards Google employee #59 wrote this about Google’s co-founders in his book on Google: “Sergey and Larry almost always decided to take the risk. They were pretty fearless;” per the Telegraph 7-11.

Public investors have long complained that Google and its research lab GoogleX invest enormous amounts of capital in very high risk endeavors with little chance of return on investment: copying all the world’s books; photographing everyone’s homes; providing Internet access everywhere in the world; pioneering software-driven cars; curing death; etc.

Consider Google’s leadership is undeterred by a fine.

Fifth, Google’s leadership looks at money and fines as mathematicians and computer scientists not as businessmen.

They know a fine is a set number that when delayed a long time from the offense diminishes relatively over time. They also know that the value that comes from Google’s offending behavior benefits from exponential increases.

More than any company ever, Google has understood and harnessed its model to two effective and powerful technological laws. Moore’s Law, that computing power doubles roughly every two years at the same cost, which generates exponential technological and economic benefits to Google. Metcalf’s Law is the insight of network effects that the value of a network is proportional to the number of connected users.

Google’s mathematician and computer scientist leadership look at the cost of a static fine in a low interest rate environment compared to the fast-growing value of continuing illegal behavior that reaps exponential, network-effect-enhanced economic benefits of more users, data, communications, and advertisements -- and they see fines as a tolerable investment-loss and the cost-of-doing-business.

Consider them undeterred by big fines because they have calculated the economic and business trade-off as hugely net positive for Google long-term.

Sixth, now it’s time to examine the actual amount of fines we are talking about to understand their lack of deterrence.

Imagine the worst-case fine for Google -- that the EU antitrust authorities somehow fine Google the maximum 10% of revenues -- much more than the EU have ever done.

Google’s annual revenues are about $70b and its cash reserves are about $65b. A ~$7b equivalent EU fine would only be ~11% of its cash, or in Google’s mind the EU would have to fine them several times that amount to truly limit their financial flexibility to rapidly advance their ambitions.

Put another way, a one-time maximal EU fine of Google, would be about five weeks of revenue and around 28% of their annual operating cash flow. That would be a very significant deterrent for most any profit-driven company, but that is not Google; Google is driven by the power and influence of “changing the world” by scaling most every facet of data, computing, and connectivity, first and fastest.

Finally, consider that Google probably spends more annually in legal, lobbying and PR expenses than the EC spends annually in enforcing antitrust and privacy laws.

Google has learned from their data over the last decade plus that in breaking antitrust and privacy laws, it is more economic to delay, negotiate, delay, pay a fine, delay, negotiate, pay a fine, delay etc. -- than it is to comply with EU law.

Consider how expert Google was in delaying DGComp’s antitrust investigation for years with three antitrust settlement offers that did admit Google was dominant or guilty of any abuses, and in delaying multiple EU and EU member state privacy fines for Street View WiFi wiretapping and for consolidating its privacy policy with no consumer consent.

Google’s PR operation is masterful in getting any fines to be a one-day story in the worldwide media with minimal reputational harm. They have learned to release cool “catnip” innovation news from its PR stockpile of cool Google “catnip” news -- at the same time as bad news to give the media something else to chase and play with.

In sum, fines alone don’t deter Google.

What deters Google is real and sustained accountability to the rule of law, and determined law enforcement that can’t be politically controlled and that is committed to securing real and sustained changes in Google’s illegal commercial behavior.

Google is only deterred by law enforcement that is as committed and strong-willed in enforcing the law as Google is in skirting it for its own long-term advantage.

Scott Cleland is President of Precursor LLC, a consultancy serving Fortune 500 clients, some of which are Google competitors. He is also author of “Search & Destroy: Why You Can’t Trust Google Inc. Cleland has testified before both the Senate and House antitrust subcommittees on Google and also before the relevant House oversight subcommittee on Google’s privacy problems.